complexity in the business environ is on rise. The advent of new technologies,
newer developments in the arena of finance and management, stiff competition
and cross border spread of business have changed the entire business landscape.
The customer is now more demanding and generally expects high quality at low
prices, the shareholders need high returns, the employees do not digest a
change and they need better treatment or else they will move to other better
organizations. All this has led to further innovations in the area of
management. Businesses exist to create value for their
owners. The term ‘value’ here
primarily refers to the ‘shareholder’s value’.
that demonstrate soaring financial performance seem to have an out-and-out
value orientation. With firmly grounded value-driving strategies they tend to
link their key metrics measuring their corporate financial performance to their
total returns. However, businesses cannot adapt too quickly to new business
opportunities and lose out to competitors on price and performance. Businesses
neither have enough infrastructures to support the segmentation strategy, nor
enough financial information to get the business through the adversities. The elementary
fiscal purpose of a corporation is to create wealth for its owners while pursuing
long-term value maximization and it is expected of their company’s management
that such cash flows get delivered.
So what should companies do in order to create value for their
shareholders? Should they decrease their capital expenditures or their spending
on their research and development goals? Should they shrink maintenance or
hiring expenses in order to meet earnings benchmarks? Or should they delay a
new project? Normally, companies manage earnings and do not really make any
strategic decisions in order to maximize the expected value; taking for granted
the fact that it would eventually be lowering the near-term earnings. Most
companies evaluate and compare their strategic value-creating investment decisions
with respect to the kind of impact it might have on the earnings they would report.
However, it is expected that they would rather measure it against the expected
incremental value of their future cash flows whereby, this expected value of their
future cash flows is nothing but the weighted average value of an assortment of
likely scenarios. Given these developments in the business environment,
companies needed more powerful and refined financial and non-financial performance
metrics to measure their corporate financial performance.